Form 940

What is Form 940 ?


Form 940 is the form used by U.S. employers to report their annual Federal Unemployment Tax Act (FUTA) taxes. This form is essential for tracking the employer's contribution to the federal unemployment insurance funds and is a legal requirement for all eligible employers.

Why File Form 940?

  • To comply with federal laws mandating the reporting of FUTA taxes.
  • To contribute towards unemployment benefits for workers who become unemployed.
  • To fulfill the employer's fiscal responsibilities towards federal employment taxes.

What is FUTA Tax?

FUTA tax is a federal tax paid by employers to fund the unemployment insurance program. Key points about FUTA tax include:

  • It's based on the first $7,000 paid to each employee per year.
  • Only paid by employers, not deducted from employee wages.

Example of FUTA Tax Calculation:

Imagine a company with three employees earning as follows: Employee A - $4,500, Employee B - $10,000, and Employee C - $7,500. The FUTA tax is calculated on the first $7,000 of each employee’s annual earnings. Therefore:

Employee A: $4,500 (as it's below the $7,000 threshold).

Employee B: $7,000 (since only the first $7,000 of earnings are considered).

Employee C: $7,000 (likewise, only the first $7,000 is considered).

The total FUTA tax liability would be: ($4,500 + $7,000 + $7,000) × 0.06 = $1,110. This is the total FUTA tax liability for that year based on these employee earnings.

How to Fill Out Form 940:

Filling out Form 940 involves several parts:

Part 1: State unemployment tax information.

Part 2: Total FUTA tax before adjustments.

Part 3: Adjustments for state unemployment tax payments.

Part 4: Net FUTA tax and balance due or overpayment.

Part 5: FUTA tax liability by quarter.

Part 6: Third-party designee information, if applicable.

Part 7: Signature and date.

Form 940 is available for download from the IRS website and can be filed electronically or mailed to the IRS. The mailing address varies depending on the business location and whether payment is included.

Importance of Accurate Payroll Tax Processing

Correct payroll tax processing, including FUTA tax compliance, is crucial for legal and financial integrity. It involves withholding the right taxes, making appropriate contributions, and ensuring compliance with various employment and tax laws. This is particularly significant for businesses with a global or remote workforce, where tax laws may vary significantly across jurisdictions.

Understanding and correctly managing Form 940 and FUTA taxes is vital for any employer, especially those with remote or global teams. Proper handling of these obligations ensures compliance with federal laws, supports the unemployment insurance system, and upholds the employer's credibility in financial management.